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September 14, 2017

How We Invested Two Lump Sums

After selling our first home in southern California, we ended up with a pretty large lump sum of cash, and after quitting my job, I rolled a couple 401(k)s into an IRA which became another large lump sum. Deciding what to do with that money took some serious consideration, especially with markets at record highs as they currently are. This post will discuss how we invested all that cash.

Whenever anyone has a large quantity of cash, it's almost always a good idea to invest it. The exact allocation can differ quite a bit, usually depending on age, but you generally get stocks and bonds. That's what we did, but the allocation we chose is pretty unusual for our age.

Disclaimer: This post is for informational purposes only and is not intended as investment advice. We are not responsible for any losses you may incur by investing in the products discussed.

House Money
I'll start by discussing how we invested the proceeds from our home sale, since that's what we did first. We actually went with 50% stocks (mutual funds) and 50% bonds. You can probably guess why we went with this allocation based on my comments above. To us it didn't make sense to put all of our money in the stock market when it is so high. That might prove to be a big mistake if the market continues to rocket upward, but that just doesn't seem likely, given the PE of the S&P 500. It might also prove to be pretty smart if the market crashes in the relatively near future. Either way, a 50/50 mix should keep us pretty well protected.

I want to make it very clear we do plan to shift most, if not all of our bonds to equities during the next market correction. We are young enough to weather pretty much anything the market can throw at us. We just didn't want to invest everything in stocks at the top of the market.

If you've read our previous post about our portfolio, this new round of investements is going to look pretty familiar. As before, our goals with this portfolio are to keep things simple while maximizing returns and minimizing risk and fees. Here's what that looks like for our house money:
  • 25% - Northern Stock Index (NOSIX) - Tracks the S&P 500
  • 15% - Fidelity Extended Market Index (FSEVX) - Tracks US small- and mid-cap stocks
  • 10% - Northern International Equity Index (NOINX) - Tracks international stocks
  • 25% - Fidelity US Bond Index (FSITX) - US bond fund
  • 25% - Northern Tax-Exempt (NOTEX) - Tax-exempt US bond fund
As you can see, we split our bonds into two funds--one taxable and the other tax-exempt. We aren't sure what our tax situation is going to look like, especially this year, so we did another 50/50 split. We could theoretically earn a little more return in the taxable fund, but there are some serious advantages to reducing your taxable income.

Another fun part of buying two bond funds is we get to compare their performance side-by-side. Surprisingly, the tax-exempt fund is actually doing better than the taxable fund so far. If that continues, I might move all our bond money to that fund.

401(k) Rollover
As I mentioned before, I decided to rollover two 401(k)s into a traditional IRA. This allowed me to reduce the number of accounts I have to manage and have a lot bigger selection of investments.

Rollovers are infamous for being complicated, but this one was surprisingly simple. I called E*Trade, where I do all my investing, and asked what the procedure would be and they walked me through it. All I had to do was call the people managing my 401(k)s and tell them I wanted to do a rollover. They would then cash out my accounts and send me a check. I then had to mail that check to E*Trade. Simple, right?

I was a little lucky both of my 401(k)s were with Fidelity, so I only had to make one call. However, they had to treat each account separately. Everything went smoothly except the USPS took their sweet time delivering the checks when I sent them to E*Trade. When my IRA was finally funded, I had to choose how to invest the funds. I was planning to make that decision on my own, but when my E*Trade contact called to let me know the checks had been received, he offered to create a portfolio recommendation. After confirming I wouldn't have to pay anything for this service, I (somewhat reluctantly) agreed to see what he could come up with.

I was leaning toward putting all the money in equities since that's what it had been invested in when it was in the 401(k)s, but this adviser recommended doing exactly what I did with the house money and stashing some of it in bonds until the market cools down. His initial recommendation consisted of eight mutual funds. It was a little more complicated than I wanted and some of the fees seemed a little high, so after some back and forth, we settled on a portfolio that looks like this:
  • 35% - Northern Stock Index (NOSIX) - Tracks the S&P 500
  • 25% - Fidelity Extended Market Index (FSEVX) - Tracks US small- and mid-cap stocks
  • 25% - Pimco Foreign Bond Fund (PFRAX) - Non-US bond fund
  • 15% - T. Rowe Price International Discovery (PRIDX) - Emerging market fund
As you can see we decided to go with a 75/25 stock/bond split. You'll recognize the first two funds from all our other portfolios, but we mixed it up with the last two. They are in slightly different categories than anything else we own, so it will theoretically help diversify our holdings. PFRAX is a foreign bond fund, which offsets all our US bonds in our other portfolio and PRIDX is a somewhat more risky international fund than we already own. Both of these funds have higher fees than I usually accept, but their performance looks pretty good, so I decided to give them a shot. I'll monitor their performance compared to our standard funds and see if they get to stick around.

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